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Legal Environment
Contract 5
Consideration
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Learning Objectives
Quick Review
The requirement of consideration
Definition of consideration
Types of consideration
Other rules for consideration
Privity of Contract
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Quick Review
A contract is a legally binding agreement
In order to create a valid contract which is
legally enforceable, there must be an offer
and an acceptance
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Requirement of Consideration
In addition to an offer and acceptance, we
also need consideration in order to create a
contract
Only contracts made by deed do not require
consideration
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Definition
Consideration was defined in Currie v. Misa
(1875) as
Some right, interest, profit or benefit
accruing to one party, or some forbearance,
detriment, loss or responsibility given,
suffered or undertaken by the other
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Definition (cont.)
Basically, one party benefits in some way or
the other party is responsible for doing
something (or both)
Paying (or promising to pay) money in
return for the goods or services is the most
common form of consideration
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Types of Consideration
Executory Consideration
Executed Consideration
Past Consideration
Forbearance
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Executory Consideration
This is where parties exchange promises to
do something in the future
A farmer promises to deliver vegetables to a
restaurant, and the restaurant promises to
pay for the vegetables
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Executed Consideration
This is where the offeror promises
something once the offeree does something
The promise only becomes enforceable
once the offeree has done the action
If Jane loses her dog and offers to pay a
reward to the person who finds it, she doesnot have to pay until someone finds her dog
and returns it to her
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Executory v. Executed
Executory consideration consists of two
promises
Executed consideration consists of one
promise followed by some action
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Past ConsiderationPast consideration does not form a valid contract
Normally, consideration is given at the time the
contract is made or at a later timePast consideration is where the action is
performed before the promise is made
This is not good consideration because the
consideration must be given in return for a
promise
This cannot be the case if the action was
performed before the promise was made
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Example of Past ConsiderationRe McArdle (1951)
Some children would become owners of a
house when their mother died
While the mother was alive, she lived in the
house with one of her sons and his wife
The wife made improvements to the house
The other children later promised to pay the
wife for the improvements
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Example (cont.)When the children refused to pay, the wife
could not force them to because she did not
do the work because of their promise
She did the work before they made any kind
of promise
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ForbearancePeople tend to think of consideration as
some kind of action which is done
However, not doing something (ie
forbearance) can also be consideration
For example, Tim has the right to sue Bob
over some matter.Bob promises to pay Tim some money if
Tim gives up his right to sue
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Forbearance (cont.)This would create a valid contract because
Tim giving up his right to sue is
consideration
His is not going to take action
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Other rules for considerationPerformance must be legal
Eg our example of the hitman in an earlier class
Performance must be possible
A promise to perform an impossible act cannot
create a contract
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Other rules for consideration(cont.)
The person to whom the promise is made
must give consideration
If Bill promises to pay John 1,000 if John
gives his car to Fred, Fred cannot enforce the
contract against John because he did not give
the consideration
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Other rules for consideration(cont.)
Consideration must be sufficient, but it doesnot need to be adequate
In other words, there must be somethingwhich the court would regard asconsideration
But the value of the consideration is decided
by the parties
The court will not decide if the value isenough
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Privity of ContractAs we saw earlier, consideration must come
from the promisee
From this, we get the principle ofprivity of
contract
This means that a contract can only impose
rights and obligations on people who areparties to the contract
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Privity of Contract (cont.)That also means that third parties (ie people
who are not party to the contract) cannot
sue to make sure the contract is performed
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Exceptions to Privity of ContractThere are a number of exceptions to the ruleof privity of contract
The most important one is the Contracts(Rights of Third Parties) Act 1999
This allows a third party to enforce a termof a contract if:
The contract says he can, or
Where the contract gives some benefit tohim
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SummaryIn addition to offer and acceptance, we alsoneed consideration to create a valid
contractBasically, one party benefits in some way orthe other party is responsible for doingsomething (or both)
Paying (or promising to pay) money inreturn for the goods or services is the mostcommon form of consideration
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Summary (cont.)Consideration can be :
Executory Consideration
Executed Consideration
Past Consideration
Forbearance
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Summary (cont.)Other rules:
Performance must be legal
Performance must be possible
The person to whom the promise is made
must give consideration
Consideration must be sufficient, but it does
not need to be adequate
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Summary (cont.)Privity of Contract
In general, third parties cannot enforce
contracts to which they are not a party
Main exception is the Contracts (Rights
of Third Parties) Act 1999
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ReadingChapter 5
Page 123 section 5.5 first paragraph
Pages 123-4 section 5.5.1
Page 124 section 5.5.2
Pages 125-6 section 5.5.3
Pages 132-3 section 5.6 first paragraph Page 135 section 5.6.1 first paragraph